Nike recently revealed plans to slash costs by $2 billion over the next three years, coupled with a downgrade in its sales forecast. In response, the stock plummeted by 10% in after-hours trading, despite a 4.7% increase throughout the year, significantly lagging behind the S&P 500. The company now anticipates a modest 1% growth in full-year reported revenue, a stark contrast to its earlier mid-single digits projection. The ongoing quarter is expected to see slightly negative reported revenue and low single-digit sales growth in the fourth quarter.

Chief Financial Officer Matthew Friend highlighted various risks impacting Nike’s operating environment, including a stronger U.S. dollar, uncertainties in consumer demand during the holiday season, and challenges in the second half wholesale order books. Macro headwinds, particularly in Greater China and EMEA, led to the revised outlook. Adjusted digital growth plans account for softness in digital traffic, increased marketplace promotions, life cycle management of key product franchises, and the impact of a stronger U.S. dollar.

Despite the challenges, Nike aims for gross margin expansion by 1.4 to 1.6 percentage points. The company plans to achieve cost reduction through streamlining its product assortment, leveraging automation and technology, reducing management layers, and enhancing efficiency through scale. The savings will be reinvested in future growth, innovation, and long-term profitability.

The cost-cutting initiative is expected to incur pretax restructuring charges of $400 million to $450 million, primarily in the current quarter, related to employee severance costs. Earlier reports suggested quiet layoffs across various divisions.

In the fiscal second quarter, Nike exceeded earnings expectations with $1.03 per share, compared to the expected 85 cents, but fell short of sales estimates for the second consecutive quarter. The company reported a net income of $1.58 billion for the three months ending Nov. 30, an increase from $1.33 billion the previous year.

As a leader among peers like Lululemon, Adidas, and Under Armour, Nike has faced profit pressures and is undergoing a strategic shift, rebuilding relationships with wholesalers like Macy’s and Designer Brands. Notably, Nike’s gross margin rebounded by 1.7 percentage points to 44.6%, reflecting a turnaround after six quarters of decline.

Facing challenges in the global retail environment, particularly in China, Nike’s performance during the crucial holiday season is closely monitored. Despite concerns about demand arising from the sales miss and emphasis on cost cuts, CEO John Donahoe remains optimistic about Black Friday week sales, citing a growth of close to 10% and record-breaking numbers for Nike digital.

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